Flipkart-Walmart deal: What it means for the etailer and the whole industry

In the early years of Flipkart, co-founder Sachin Bansal liked to take on his colleagues in rather intense rounds of console and computer games. No one handed the game to the boss. Bansal fought hard — he wanted to be a pro gamer himself — and those who beat him were treated to lunch.

While this helped in letting off steam as he steered the fortunes of India’s fastest growing online retailer, Bansal, now 37, kept the adrenaline going for more than a decade as he led the company he founded with Binny Bansal, helped raise over $4 billion in funding and eventually handed over the chief executive officer’s baton to Kalyan Krishnamurthy.

Both the Bansals are gaming geeks — Binny’s onetime career aspiration was to build computer games — and now they are gearing for one crucial round of play. They are preparing to sell their company, which started with selling a book in October 2007, to Walmart, a $500 billion American behemoth, known for its order, scale and stinginess.

Flipkart will be its route to the great Indian market. Flipkart, over the past few years, has been in a dogged fight with American tech major Amazon for India’s online market. While Flipkart has raised billions of dollars to fuel this duel, Amazon has committed over $5 billion to its India business.

In the last couple of years, this confrontation saw other rivals falling by the wayside — for instance, Snapdeal, which spurned a $1 billion takeover by Flipkart, is today valued at $100 million or less — and these two firms establishing a firm grip on India’s e-commerce market, which is expected to hit $200 billion by 2026, according to Morgan Stanley.

Although Amazon had also thrown its hat into the ring to buy Flipkart, a cluster of bankers, e-commerce executives and analysts say Walmart has, for all purposes, clinched the deal. Meanwhile, Alphabet, Google’s parent company, is also reportedly willing to commit up to $2 billion for a minority stake in the company. That would see the combined might of Alphabet, Walmart, and Flipkart taking on Amazon. Walmart declined to comment for this piece and emails to Flipkart went unanswered.

Tipping Point

Some experts say that the Walmart-Flipkart deal — when signed — will mark a tipping point for the industry. “To anyone who was looking for a pure Indian e-commerce success story, this deal will be seen as a disappointment,” says Anindya Ghose, a professor at New York University. “It indicates yet another failure of a primarily homegrown Indian firm (Flipkart, for all its foreign investors, is an Indian firm) to take on an MNC Amazon) and compete credibly without having to partner with another MNC (Walmart).”

India is the next big prize after US and China, and this deal will give Walmart a substantial foot in the door. Amazon is, meanwhile, focused on the prize — a rapidly growing number of Indians buying online.

“Amazon. in is the fastest growing marketplace in India, and the most visited site on both desktop and mobile, according to comScore and Similar-Web,” Amazon founder Jeff Bezos said in a note to shareholders in April. “The Amazon.in mobile shopping app was also the most downloaded shopping app in India in 2017, according to App Annie.”

The retail giant has made strong gains in electronics and fashion and apparel. “In the US, Walmart is the only formidable competitor left for Amazon,” says Kartik Hosanagar, professor, The Wharton School, US. “Walmart has been growing its e-commerce operations a lot and Amazon has been increasing its footprint with physical stores. It’s natural for that battle to spill into the international turf as well. Walmart’s looming investment in Flipkart reflects that.”

Walmart’s Second Strike

Despite the pessimism of experts such as Ghose of NYU, Flipkart is being positioned as the arrowhead for Walmart to have another crack at the Indian market, four years after it broke its joint venture with Bharti for a cash-and-carry business. This time around, Walmart’s choice in India is starkly different. While Flipkart has absorbed billions of dollars of investor money to rapidly grow its business, its main bait has been deep discounts.

Flipkart, say analysts, has not only built a strong business online, but it also has strong ties with some 100,000-plus sellers and relationships with companies such as Xiaomi, a leading consumer electronics brand. Back in 2014, Xiaomi had tied up with Flipkart to host a flash sale of its Mi3 phone, which saw some 500,000 users trying to log in. Xiaomi sold out its inventory in eight minutes and the server crashed.

“If you have crashed Flipkart it means you have arrived,” Xiaomi India’s Manu Jain told ET Magazine in November last year.

While Walmart has made a series of deals in geographies such as China, it faces online giants as well as brick-and-mortar retailers. In India, too, there are local players. DMart, a company founded on the same frugal foundation as Walmart, is booming. It has over 140 stores, with 20-30 expected to be set up annually. Kishore Biyani of Big Bazaar — who visited Amazon’s headquarters in Seattle in January — is on a comeback trail, after selling or shuttering many of his businesses over the past few years.

In India, Walmart has also had to find a way around legislation banning foreign direct investment in multi-brand retail. While the tie-up with the Bharti Group provided the American giant with some insights into the Indian market, the differences in outlook eventually ended the rocky relationship in 2013.

Then, in 2015, Walmart was accused of paying bribes to local officials in India. Walmart re-entered the picture about a year ago when it began due diligence on Flipkart.

“Walmart has been interested in India for over a decade now,” says Hosanagar. “Its previous partnership with Bharti failed. Flipkart will be a better partner for Walmart because Flipkart has an ownership structure and a corporate culture that will suit Walmart better than Bharti did.”

Walmart has been engaged in a bruising battle with Amazon — in the US and elsewhere. While its home turf is under threat from Amazon, which is pushing more and more people to shop online and even buying old-school players like Whole Foods, Walmart has been desperate to globalise its business and build its own technological arsenal. It has acquired Jet.com, Shoebuy, and Bonobos to beef up its tech muscle. The results have been mixed. In China and Japan, it struggled to make a mark.

Now, Flipkart’s last steps as an independent company may also be Walmart’s first steps to redeem its India business. “Global business and India share a symbiotic relationship and the country is the most attractive market in present times when there is a slowdown in many parts of the world,” Krish Iyer, Walmart’s India chief, said at an event in Delhi recently.

In some categories such as apparel and white goods, Flipkart will be aided by the Bentonville-based behemoth. For example, Flipkart and its fashion and apparel businesses, Myntra and Jabong, want to scale their private label initiatives and could be helped by the vast reach of the giant retailer. Last year, Sachin Bansal made it clear that Flipkart was focused on growth, even as it was raising funds and talking quietly to Walmart on a possible sale.

“We have some focus areas we continue to invest in… whether it is our supply chain, expansion of our selection and thinking of new ways of bringing down prices. AI and machine learning are also focus areas,” he told ET Now on the sidelines of the ET Startup Awards last year. Several investors, partners, and vendors who have dealt directly with Walmart say Flipkart will benefit from the former’s focus on profits and bottom line.

“Flipkart’s margins have improved dramatically (from around -50% to 25-30%), but this will help them think more like a retailer and less like a discount-driven etailer,” says Arvind Singhal, CEO, Technopak, a retail consultancy. “In this deal, what Walmart values the most is Flipkart’s 100 million users and the access to perhaps the only large market they haven’t formally entered.”

According to data from his firm and industry sources, the total Indian retail market as in FY2018 is $650 billion and a tenth of this is occupied by organised retail. E-commerce accounts for 3%, making it a $19.5 billion market.

Go Cart

Flipkart’s transition is unlikely to be painless. In the shift from profligacy to profits, Flipkart is also expected to look inward and streamline the bloated marketing, sales and supply chain teams, two senior management consultants told ET Magazine.

Despite Sachin Bansal’s statement stressing on AI and machine learning, technology is not likely to be a big priority going forward. Walmart invests several billion dollars in technology and opened a lab in Bengaluru two years ago to build much of this in-house, including Walmart Pay, a service that allows customers to pay from an app.

Flipkart, say two senior executives in e-commerce companies, wants to increase e-commerce share in overall retail, closer to that in the US and China, where it is 10-12% of the total retail market. One of the executives points to its aggressive push in two ways — going deeper into the hinterland and widening its offerings in large goods, such as white goods and furniture.

“This is an opportunity for Flipkart to build several large, scalable and more profitable vertical businesses,” says a senior executive. In September 2017, Flipkart restarted its furniture business, which it had put on ice in 2016, and has also been linked to furniture marketplace Pepperfry. “With Walmart’s network, each of these can be billion-dollar businesses on their own.”

There are other areas that could scale. Myntra is already nudging a billion dollars in GMV, and could be aided in its private label push. The parent company made a big splash with private labels in 2016, launching over 50 of them and is reportedly launching 160 more.

Started two years ago, Flipkart’s private label began under the SmartBuy brand for consumer electronics and accessories, and has since expanded into men’s apparel with Metronaut and women’s with Divastri and the MarQ range of white goods. Working with Walmart, which has large in-house brands, Flipkart is expected to hasten the growth of this business.

As Flipkart moves to a new 8,30,000 sq ft headquarters in Bengaluru, the future of India’s largest homegrown e-commerce company may unfold in a proposed 100-acre logistics park, where the firm is planning to invest hundreds of millions of dollars and employ some 20,000 people, directly and indirectly. Set up to take advantage of the GST rollout — and expected to cut lead times by 20% — this unit, combined with increased investment in Ekart (Rs 1,830 crore in mid-2017), will smoothen Flipkart’s new journey.

Walmart has storied skills in managing supply chain, logistics and driving down costs and it could help Flipkart fine-tune its business as it hopes to compete with Amazon and build a hybrid model — online and offline. The future is a different game.